When reviewing a loan request, the lender is primarily concerned about repayment. The criteria for making a loan are based on several things, including:
- Business cash flow
- Business credit report
- Owner's personal cash flow
- Owner's personal credit report
Business Cash Flow
After the loan is made, will your business have adequate cash on hand to repay the debt? You will need to make a realistic assessment of your cash flow and determine how much money you can pay back. Be conservative when making your evaluation.
Business Credit Report
Many loan officers will order a copy of your business credit report from a credit-reporting agency. Therefore, you should work with these agencies to help them present an accurate picture of your business.
Dun and Bradstreet (D&B) is the agency that most banks use to look at your firm's creditworthiness. Their report can include details about ownership, initial date of operation, inventory value and description, and financial condition, and may also include information regarding payment records based on collection experience. The report will generally also include an opinion regarding the creditworthiness of the company, or enough information to help the bank make a prudent judgment.
Owner's Personal Cash Flow
Do you have an adequate cash flow from the business to take care of your personal needs? The bank doesn't want to see that you will have to draw more cash from the business than it can afford to pay.
Owner's Personal Credit Report
Do you have a sound record of creditworthiness as indicated by your credit report, work history and references? Together with your firm's business credit history, a solid personal credit rating is very important since the small business is typically an extension of the individual operating it. Most sources of financing or credit now rely on your 'credit score' (known as FICO) to evaluate your credit worthiness. (In fact, although a business plan is a recommended component of the loan request process, given the increasing importance of the credit score, it may now be possible to obtain loan approval in certain instances based on your score in lieu of a business plan). FICO is a numeric method that uses three digits to predict the likelihood of meeting your credit obligations. The score evaluates your credit payment history, number of open accounts, overall credit balances and public records, including judgments and liens.
A FICO score approaching 700 will generally be looked upon favorably, while a lower score (e.g. below 650) will cause lenders to be increasingly cautious. Several sources will charge a modest fee to calculate your score, which is based on your credit report. Services like www.myfico.com will provide you with several report formats and notify you of credit inquiries that could affect your score.
Also, thanks to the 2003 Fair and Accurate Credit Transactions Act, every American now has the right to a free copy of his or her credit report (upon which the FICO score is based) every year from each of the three major credit bureaus – Equifax, Experian and TransUnion. To obtain your report, go to www.annualcreditreport.com, which is the only authorized source for consumers to access their annual credit report online for free, or call toll free 877-322-8228.
Small Business Administration Loans
The Small Business Administration (SBA) offers numerous loan programs to assist small businesses. It is important to note, however, that the SBA is primarily a guarantor of loans made by other institutions. If you can secure an SBA loan guarantee, this is a big plus in dealing with your banker. See the section on SBA Loans for more information.